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Split Dollar Arrangements Funding Nonqualified & LTI Plans - YouTube
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[Music]
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today's video is on split dollar
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arrangements funded with life insurance
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for closely held businesses so this is
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the final of a five-part video series
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the first was on how to have this
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conversation the second was on
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compensation the third was on
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um retirement planning for highly
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compensated employees the fourth was a
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non-profit executives
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and how to plan for retirement for those
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individuals and this is the final one on
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split
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life insurance plans that can fund any
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one of these uh potentially in
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combination with other things
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our split dollar is a splitting of
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dollars by dollars we're talking about
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the dollars in this example is used
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though the the cash value of a life
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insurance policy or death benefit
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the the reason why we're using life
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insurance to fund
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the split dollar arrangement and the
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right the split dollar is an arrangement
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between the employer
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and the employee agreeing to the split
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the life insurance is a funding
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mechanism and the life insurance is used
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versus other
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alternatives to for the following
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reasons
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um there's a built-in mechanism for a
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collateral assignment where the insurer
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basically ensures the enforcement of the
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agreement if you had held in a brokerage
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account these same funds for example
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the brokerage account account's not
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going to enforce the collateral
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assignment you'd have to go legally
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uh you know possibly sue somebody to get
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the money that they weren't giving it
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back for example
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and what i mean by giving it back
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recruiting the costs that the employer
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contributed to the plan uh insurance is
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exempt from certain reporting
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requirements and erisa agree
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arrangements
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that other alternatives to insurance
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don't have
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you have to have less than 100 employees
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to be exempt using insurance but
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that's the case and finally the tax
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deferred nature of the
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insurance means that the employer won't
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have to be paying taxes on trading and
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so forth in between
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and for this plan for the benefit of
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this plan meanwhile the executive gets
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tax-free income assuming the policy
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performs
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as anywhere close to what's been
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illustrated
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so the benefits of this type of plan for
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an employee is that it's
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something that's not available to other
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employees typically it's an alternative
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to minority interest in the
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equity of a business if they ultimately
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determine that's not what they want
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because it's a liquid basically they
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have to sell to the majority partner
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for some agreed upon amount whether they
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agree with it or not most likely
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and um they'll have potential input in
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the actual design and
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tons of flexibility so it's not like a
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non-qualified plan where they
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have to follow certain rules and so
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forth they can do almost anything they
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want with the design of this
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the employer finds this attractive
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because they can exclude employees that
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don't need to be part of it
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and make it more targeted they can
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recruit the costs of this benefit that's
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a big feature of this plan
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there's low administrative costs there's
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a flexibility in designing the plan
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and finally it's an alternative to
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giving away equity which is also
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attractive to an employer at times
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so i'm going to get going to give you an
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example i'm going to illustrate
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graphically an example of an
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employee-owned policy
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during employment so the employer enters
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into an agreement with the employee and
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loans the premiums to the employee
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to fund the insurance policy the
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employee
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the co makes the contribution of the
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insurance policy that they will own
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they'll have to pay tax on imputed
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interest the imputed interest is uh
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generally uh it's the af is the ethical
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funds rate
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or afr rate that's uh issued by the us
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federal government
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and on a long term basis so it's about
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one percent now so one percent of
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whatever the amounts of the other
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premiums were
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and um if they were to die the the
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employee
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the beneficiaries named would get the
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death benefits
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less the amount of the outstanding loan
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another time they might have a tax is
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when they invest in the benefits
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so once the employee actually invests
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and you can actually put a vesting
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schedule on these benefits too
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once they invest the employee owes the
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tax on it says if they got receipt
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now they might have the money tied up in
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the insurance policy so
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there may be arranging with the employer
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to go ahead and bonus up for the taxes
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do as well
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or pay the other the taxes out of pocket
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besides something other than the
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insurance
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now at separation of the employed
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employee owned policy
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they have to repay the loans usually
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it's going to come from the insurance
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policy or
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the employer could forgive the debt uh
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if they do forgive the debt
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the employee always taxes on the amount
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forgiven to the irs
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if they have to repay the loan it's
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going to come from the insurance policy
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as they said if they don't they'll be
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able to surrender
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surrender for cash take tax free
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retirement income or um
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just keep the policy for its death
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benefit but either way the beneficiaries
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get the death benefit
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now i want to show you illustration what
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this looks like in a real life example
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so
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employer cost recovery coming from the
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employee owned policy
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they pay fifty thousand for five years
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250 000 over five years total
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they get cost recovery back at 200 year
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15 they're pulling their 250 000
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back out of the policy what we see that
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does is um
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is it reduces the the uh the cash height
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from 399 to 158 in this example
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and there's still about 840 000 death
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benefit
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now at retirement age 65 this is a 40
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year old female we're looking at
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using a 5.5 rate or assumption return
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iul
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uh they're getting 18 000 a year 18 44
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for 20 years in retirement tax free
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and there is a minor death benefit left
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over has to be a death metal
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to keep those benefits from tax free um
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so you see that's a
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minor death benefit just meant to keep
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costs low
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finally let's look at an employer-owned
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policy so the split-down arrangement
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could be held
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made so that the employer owns the
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policy the employee and the employer
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apply for a policy
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the only player's going to own it
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they're going to go ahead and
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pay the premiums on the policy and own
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it the beneficiary is named by
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the executive the executive does have to
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pay
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tax on the economic benefit of the
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insurance basically the term rates for
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that death benefit
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the death benefit less the premiums paid
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will be paid out to the beneficiaries in
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the event
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of death during the working years now at
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separation
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the employer owned policy the employer
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recruits the
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the premiums that they paid from the
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existing policy that they own
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they may also bonus this whole policy to
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the employee
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all of it or some of it the employee
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will have to pay tax on the value
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of the policy at that time so that's uh
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basically the forgive
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the the the economic value of it
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and in that example with a 40 year old
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female where you put 50
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000 here for five years and they don't
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they forgive the debt so it's never
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pulled out of the policy using the same
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numbers
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as before now you get income of 60 966
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for 20 years tax free
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um what we want to cover now is that
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there are things you need to do to get
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this in place
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so it's not a matter of just applying
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for an insurance policy you have to get
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an agreement signed so forth so you do
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need
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a corporate resolution assigned a split
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dollar agreement between
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the executive and the company uh an
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arista cover letter has to go to erisa
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that's the one requirement
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uh policy application of course
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collateral note that uh
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that between the employer and the
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employee which the
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collateral assignment can be placed to
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the insurance company and a notice
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consent form which is sent to the
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which is kept and then an irs reporting
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form 8925 for tax reasons every year
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just reporting the irs exists the all
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these things
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we can help you with and obtain these
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friends so these are not difficult
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things you might not have them yourself
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what we do is for templates
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thank you so much for listening hope
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this has been helpful to you if you have
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any questions or have a case you want to
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discuss please look us up on the web
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cbsbrokers.net or contact me using the
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email address here
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provided or the telephone thank you so
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much
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you
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